Systematic liquidity and leverage

Kahraman, Bige and Tookes, Heather (2016) Systematic liquidity and leverage. Saïd Business School Working Paper 2016-27.

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Abstract

Does trader leverage exacerbate the liquidity co-movement that we observe during crises? We exploit the threshold rules governing margin trading eligibility in India to identify a causal relationship between trader leverage and the extent to which a stock’s liquidity covaries with the liquidity of other stocks. We find that trader leverage causes sharp increases in comovement during severe market downturns. For our sample of stocks, the estimates suggest that the trader leverage channel explains about one third of the increase in liquidity commonality that we observe during crises. Consistent with downward price pressure due to the deleveraging of traders who rely on borrowing, we also find
that leverage causes stocks to exhibit large increases in return comovement during crises.

Item Type: Oxford Saïd Research Paper
Keywords: Finance
Subject(s): Finance
Date Deposited: 11 Nov 2016 16:06
Last Modified: 27 Feb 2017 14:10
Funders: N/A
URI: http://eureka.sbs.ox.ac.uk/id/eprint/6246

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